Ivy Cert Petition_final for printers rev1

No. 16-_____

IN THE

_________

TRUSTEES OF THE UPSTATE NEW YORK ENGINEERS

PENSION FUND,

Petitioners

,

v.

IVY ASSET MANAGEMENT LLC, LAWRENCE SIMON,

HAROLD WOHL

Respondents.

_________

ON PETITION FOR WRIT OF CERTIORARI TO

THE SECOND CIRCUIT

_________

PETITION FOR A WRIT OF CERTIORARI

_________

LOUIS P. MALONE, III

SARAH M. SHALF

Counsel of Record

O’DONOGHUE &

EMORY LAW SCHOOL

O’DONOGHUE, LLP

SUPREME COURT

4748 Wisconsin Ave., NW

ADVOCACY PROGRAM

Washington, DC 20016

1301 Clifton Road

(202) 362-0041

Atlanta, GA 30322

(404) 712-4652

[email protected]

No. 11-1518

IN THE

Supreme Court of the United States

R

ANDY

C

URTIS

B

ULLOCK

,

Petitioner,

—v.—

B

ANK

C

HAMPAIGN

, N.A.,

Respondent.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE ELEVENTH CIRCUIT

BRIEF IN SUPPORT OF RESPONDENT FOR AMICI CURIAE

PROFESSORS RICHARD AARON, JAGDEEP S. BHANDARI,

SUSAN BLOCK-LIEB, JOHN COLLEN, JESSICA DAWN

GABEL, KENNETH N. KLEE, GEORGE W. KUNEY,

LOIS LUPICA, THERESA J. PULLEY RADWAN,

NANCY B. RAPAPORT, MARIE T. REILLY,

KEITH SHARFMAN, AND ROBERT ZINMAN

R

ICHARD

L

IEB

R

ESEARCH

P

ROFESSOR OF

L

AW

S

T

. J

OHN

’

S

U

NIVERSITY

S

CHOOL OF

L

AW

8000 Utopia Parkway

Jamaica, New York 11439

(212) 479-6020, or

(718) 990-1923

[email protected]

Counsel of Record for

Amici Curiae Professors

January 14, 2013

d

i

QUESTION PRESENTED

The Second Circuit ruled that a pension fund had

no standing to assert breach of fiduciary duty claims

under ERISA against its investment advisor for

continuing to recommend investment in an

investment vehicle when the advisor had privately

expressed significant doubts about the continued

prudence of that vehicle. The stated value of the

fund’s investment in the vehicle at the time of the

breach was over $36 million, which could have been

withdrawn at that time and invested elsewhere.

Although the Second Circuit agreed the complaint

adequately alleged a breach of fiduciary duty, judged

according to the information the investment advisor

knew at the time, it nevertheless found there was no

loss (and therefore no Article III standing) because

the value of the fund’s investment value on paper

was discovered, 10 years later, to be largely false

profits – having been invested with Bernard Madoff

Investment Securities.

Therefore, the question presented is: Whether the

Second Circuit’s decision to calculate loss for Article

III standing purposes based on hindsight in an

ERISA case creates an end-run around to the well-

established no-hindsight rule for ERISA fiduciary

duty claims, which says that a court must assess a

breach of the fiduciary duty of prudence on the basis

of the “circumstances then prevailing,”

see

29 U.S.C.

§ 1104(a)(1)(b) (2012), creating a split in the circuits?

ii

TABLE OF CONTENTS

QUESTION PRESENTED ........................................ i

TABLE OF CONTENTS ........................................... ii

TABLE OF AUTHORITIES ..................................... v

OPINIONS BELOW ................................................. 1

JURISDICTION ........................................................ 1

STATUTORY PROVISIONS INVOLVED ............... 1

STATEMENT OF THE CASE .................................. 2

I. STATEMENT OF FACTS .............................. 2

A. Initial Investment and Initial

Concerns .................................................... 4

B. Meeting with Trustees Regarding

BLMIS ....................................................... 6

C. Acquisition by BONY Mellon and

Arrest of Madoff ........................................ 8

II. PROCEEDINGS BELOW .............................. 9

REASONS FOR GRANTING THE WRIT ............. 12

I. The Second Circuit Has Created a

New Rule for Calculation of Loss

iii

That Conflicts with Bedrock Erisa

Principles, and Creates a Split in the

Circuits ......................................................... 12

A. It Is a Bedrock Principle of ERISA

Law That a Breach of Fiduciary

Duty Is Judged as of When It

Occurs, Without the Benefit of

Hindsight. ............................................... 13

B. The Loss as a Result of a Breach

of Fiduciary Duty Is Likewise

Measured Based on What Was

Known at the Time, Compared to

the Available Prudent

Alternatives, in Order to Put the

Investor in the Same Position it

Would Have Been but for the

Breach ..................................................... 15

C. The Second Circuit Has Created

An End-Run Around These

Bedrock ERISA Principles,

Leading to Results That Are

Inconsistent With the Purposes of

ERISA, and Harmful to Both the

Innocent Investor And the Public. ......... 18

i. This exception fails to provide

an adequate remedy to

innocent victims of imprudent

fiduciaries, contrary to the

stated goals of ERISA.. ..................... 19

iv

ii. This exception rewards the

lying fiduciary, which is also

contrary to the goals of ERISA. ........ 20

iii. This rule incentivizes

fiduciaries to hide suspicions

regarding investment vehicles,

to the detriment of the

investing public. ................................ 21

CONCLUSION ........................................................ 23

v

TABLE OF AUTHORITIES

Cases

Becker v. Becker

, 416 A.2d 156 (Vt. 1980) ............ 16

Bernstein v. Vill. of Wesley Hills

, 95 F.

Supp. 3d 547 (S.D.N.Y. 2015) ................................. 16

Cent. States, Se. and Sw. Areas Pension

Fund v. Cent. Transp.

,

Inc.

, 472 U.S. 559

(1985)… ................................................................... 13

Dardaganis v. Grace Capital

, 889 F.2d 1237

(2d Cir. 1989) ........................................................... 16

DiFelice v. U.S. Airways Inc.

, 497 F.3d 410

(4th Cir. 2007) ................................................... 12, 14

Donovan v. Bierwirth

, 574 F.2d 1049 (2d

Cir. 1985) ........................................................... 10, 15

Eberhard v. Marcu

, 530 F.3d 122 (2d Cir.

2008) ........................................................................ 16

Fifth Third Bancorp v. Dudenhoeffer,

134 S.

Ct. 2459 (2014) ........................................................ 14

Fin. Inst. Ret. Fund v. Office of Thrift

Supervision

, 964 F.2d 142 (2d Cir. 1992) .............. 21

In re Beacon Assocs. Litig.

, 745 F. Supp. 2d

386 (S.D.N.Y. 2010) ................................................ 21

vi

Ingersoll-Rand Co. v. McClendon

, 498 U.S.

133 (1990) ................................................................ 20

O’Halloran v. First Nat’l Bank

, 350 F.3d

1197 (11th Cir. 2003) .............................................. 16

Pension Benefit Guar. Corp. ex rel. St

Vincent Catholic Med Ctrs. Ret. Plan v.

Morgan Stanley Inv. Mgmt. Inc.

,

712 F.3d

705 (2d Cir. 2013) .............................................. 13, 14

Roth v. Sawyer-Cleator Lumber Co.

, 16 F.3d

915 (8th Cir. 1994) ............................................ 12, 14

Strom v. Goldman Sachs

, 202 F.3d 138 (2d

Cir. 1999) ................................................................. 20

Tibble v. Edison Int’l.

, 135 S. Ct. 1823

(2015) ................................................................. 10, 14

Trs. of the Upstate N.Y. Eng’rs Pension

Fund v. Ivy Asset Mgmt.

, 843 F.3d 561 (2d

Cir. 2016) ................................................................. 11

Trs. of the Upstate N.Y. Eng’rs Pension

Fund v. Ivy Asset Mgmt.

, 131 F. Supp. 3d

103 (S.D.N.Y 2015) ................................................. 11

Varity Corp v. Howe

, 516 U.S. 489 (1996) ............. 20

vii

Statutory Provisions

29 U.S.C. § 1002(21) ................................................. 2

29 U.S.C. § 1104 ............................................... i, 9, 13

29 U.S.C. § 1109 .......................................... 10, 11, 15

Other Authorities

Restatement (Third) of Trusts § 100 (2012) .......... 15

Restatement (Second) of Trusts § 205(c)

(1959) ....................................................................... 15

1

PETITION FOR A WRIT OF CERTIORARI

________

The Trustees of Upstate New York Engineers

Pension Fund respectfully petition for a writ of

certiorari to review a judgment of the U.S. Court of

Appeals for the Second Circuit.

________

OPINIONS BELOW

The opinion of the U.S. Court of Appeals for the

Second Circuit is reported at

Trustees of Upstate

New York Engineers Pension Fund v. Ivy Asset

Management

, 843 F.3d 561 (2d Cir. 2016).

________

JURISDICTION

The judgment of the court of appeals was entered

on December 8, 2016. Pet. App. 1a. The court denied

rehearing on February 13, 2017. This Court has

jurisdiction under 28 U.S.C. § 1254(1). Pet. App. 94a.

________

STATUTORY PROVISIONS INVOLVED

29 U.S.C. § 1104(a)(1)(B) provides: “[A] fiduciary

shall discharge his duties with respect to a plan

solely in the interest of the participants and

beneficiaries and . . . (B) with the care, skill,

prudence, and diligence under the circumstances

then prevailing that a prudent man acting in a like

2

capacity and familiar with such matters would use in

the conduct of an enterprise of a like character and

with like aims . . . .”

29 U.S.C. § 1109(a) provides: “Any person who is

a fiduciary with respect to a plan who breaches any

of the responsibilities, obligations, or duties imposed

upon fiduciaries by this subchapter shall be

personally liable to make good to such plan any

losses to the plan resulting from each such breach,

and to restore to such plan any profits of such

fiduciary which have been made through use of

assets of the plan by the fiduciary, and shall be

subject to such other equitable or remedial relief as

the court may deep appropriate, including removal of

such fiduciary. . . .”

________

STATEMENT OF THE CASE

I. Statement of Facts

Plaintiff is the Board of Trustees (“Trustees”) of

the Upstate New York Engineers Pension Fund

(“Pension Fund” or “Fund”).

1

Defendant Ivy Asset

Management LLC (“Ivy”) is a registered investment

adviser under the Investment Advisers Act of 1940,

and served as a fiduciary to the Plan within the

1

The Pension Fund is the successor to the Engineers Joint

Pension Fund, Local Unions Nos. 17, 106, 410, 463, 545, and

832 of the International Union of Operating Engineers, AFL-

CIO (“Plan”). Pet. App. 3a.

3

meaning of 29 U.S.C. § 1002(21)(a). Defendant

Lawrence Simon was Ivy’s president and chief

executive officer, and then its vice-chairman, while

Defendant Howard Wohl was Ivy’s vice-president

and chief investment officer, and also its vice-

chairman. Pet. App. 4a. It is undisputed that,

throughout its relationship with the Fund and the

Trustees, Ivy and its officers were acting as

“fiduciaries” as that term is defined and used in

ERISA. Pet. App. 6a-7a.

See

29 U.S.C.

§ 1002(21)(A)(i) and (ii) (2012).

For eighteen years, running from 1990 through

2008, assets of the Plan, under the direction and

advice of Ivy, were directly invested with Bernard

Madoff Investment Securities (“BLMIS”), Bernard

Madoff’s (“Madoff”) investment advisory business.

Pet. App. 6a-9a. On December 11, 2008, BLMIS was

exposed to be a Ponzi scheme. Pet. App. 23a. As a

result, the Fund lost its entire stated investment

value in BLIMIS of $51,473,794. Pet. App. 23a. Ivy

had been suspicious of Madoff, but continued to

advise the Plan to maintain its investment in BLMIS

despite wanting to withdraw Ivy’s own investment in

Madoff’s fund. Pet. App. 6a-18a. The Second Circuit

affirmed the Southern District of New York’s

dismissal of the Trustees’ suit against Ivy for breach

of fiduciary duty because the court limited Ivy’s

exposure for its breaches of fiduciary duty to the

Fund’s principal investment in BLMIS net of

withdrawals. Pet. App. 84a-85a, 93a. In doing so, the

Second Circuit grossly miscalculated the loss by

considering the loss in hindsight rather than at the

time of the breach.

4

A. Initial Investment and Internal

Concerns

In 1990, Ivy advised the Fund to invest plan

assets in BLMIS. Pet. App. 6a. Notably, Ivy’s

compensation included a fee linked solely to the

performance of the BLMIS investment. Pet. App.

13a, 15a. Over several years, Ivy continued to

periodically advise the Fund to invest additional

assets in BLMIS, as well as occasionally to withdraw

proceeds. Pet. App. 7a–9a.

In 1997, Ivy began to have doubts about the

BLMIS investment. Pet. App. 6a-7a. In Ivy’s initial

dealings with BLMIS, Madoff had detailed how his

“split-strike conversion strategy” relied upon his

trading Standard & Poor’s 100 Index options (“OEX”)

on the Chicago Board Options Exchange (“CBOE”) at

high volume. Pet. App. 9a. Over the course of 1997,

Ivy discovered that there were not enough option

trades on the CBOE to support Madoff’s supposed

trades for Ivy’s clients, let alone the other assets

Madoff managed. Pet. App. 9a-10a. When confronted

about the possibility of trading options in excess of

what was reported on the CBOE, Madoff said that it

was rare for this to happen, but that it was possible.

Pet. App. 11a.

Further raising Ivy’s concern about the BLMIS

investment, in 1998, Madoff’s explanations of his

success began to conflict. Pet. App. 11-12a. In

February of that year, Madoff explained to Ivy that

market timing and volatility analysis were central to

5

the success of his split strike strategy.

Id.

In

December, Madoff offered a new explanation, now

attributing his success to efficiently executed trades

rather than his being an expert in timing the

market.

Id.

Immediately after Ivy’s December meeting with

Madoff, Wohl wrote an internal email proposing that

Ivy withdraw all of its Proprietary Funds’ BLIMIS

investments. Pet. App. 12a. He wrote that

investment with Madoff “remains a matter of faith”

and that “this doesn’t justify any investment, let

alone 3%.”

2

Pet. App. 12a. Simon immediately

responded to this email with an observation that,

although Ivy’s own investment in BLMIS was small,

Ivy was “on the legal hook” for the more significant

investments of its clients, and Ivy’s divesting from

Madoff funds would cause clients to question their

investments, so that the total assets under Ivy’s

fiduciary responsibility potentially would decrease

by $300 million, which would decrease Ivy’s overall

fees by $1.6 million or more. Pet. App. 13a. He

questioned whether Ivy was “prepared to take all of

the chips off the table . . . and one wonders if we ever

escape the legal issue of being the asset allocator and

inducer, even if we terminate all Madoff related

relationships?” Pet. App. 13a. The following day,

Ivy’s Chief of Investment Management sent his own

response, advising a middle ground: that Ivy

withdraw all its own assets from Madoff

2

At this time Ivy decided to limit its own investment in

BLMIS to 3%. Pet. App. 15a.

6

investments, and issue a statement to clients

explaining why, leaving the ultimate decision to the

clients as to whether they too would withdraw from

BLMIS. Pet. App. 13a-15a.

In their emails, all three officers expressed

concern about Ivy’s legal liability if the firm kept its

clients’ assets invested in BLMIS. Pet. App. 12a-15a.

Yet, ultimately, Ivy decided not to completely

withdraw its own proprietary position in BLIMIS nor

to inform its clients of Ivy’s conclusion that a

continued investment in BLIMIS had become

imprudent. Pet. App. 15a.

B. Meeting with Trustees Regarding

BLMIS

Two weeks after expressing these doubts

internally, Ivy met with the Trustees to review the

Fund’s investments. Pet. App. 15a. During this

meeting, while discussing whether the Fund should

increase its investment in BLMIS, Simon expressed

mild concerns about increasing investments in

BLMIS, citing Madoff’s age, the inability to replicate

his results, and the small size of his accounting firm.

Pet. App. 16a. Consequently, one of the Trustees

prudently asked explicitly whether the Fund should

have any money invested in BLIMIS at all. Pet. App.

16a.

In response, and contrary to its fiduciary duty,

Ivy did not inform the Trustees that Ivy had

concluded that a continued investment in BLIMIS

had become imprudent, nor did Ivy advise the

Trustees to liquidate the Fund’s investment in

7

BLMIS. Pet. App. 16a. To the contrary, Ivy stated

that its due diligence had revealed no problems with

BLIMIS.

3

Pet. App. 16a. Rather, Ivy advised the

Fund that its additional investment in BLMIS

should be smaller than what had originally been

contemplated. As of that date, the stated value of the

Fund’s BLIMIS investment was $36,629,757. Pet.

App. 16a.

Continuing its breach of fiduciary duties, on

January 12, 1999, Ivy sent a letter to the Trustees

wherein it stated that “[w]e have no reason to believe

that the Madoff account is anything other than what

Ivy's experience has shown and what the record

demonstrates.” Pet. App. 17a. Ivy further

recommended that the Fund invest in BLIMIS up to

15% of the Fund’s overall funds, five times the

percentage Ivy had concluded was prudent to invest

on behalf of its own Proprietary Funds. Pet. App.

17a.

3

Though at that time Ivy was concerned enough about

BLMIS to know that it was an imprudent investment, critically,

Ivy did not know that BLMIS was a Ponzi scheme. Pet. App.

13a-15a.

see also id.

¶ 71)

In reply, Simon wrote:

Amount we now have with Bernie

in Ivy's partnerships is probably less

than $5 million. The bigger issue is the

$190 mill or so that our relationships

have with him which leads to two

problems, we are on the legal hook in

almost all of the relationships, and the

fees generated are estimated based on

17+% returns are as follows:

Engineers $ 35 mill $510K x 2/3 = $340K

Beacon 30 mill $400K x 1/2= 200K

Jeanneret 100 mill $950K x 1/2 = 475K

13a

Remaining 35 mill Fair Share Guess

200K (Income Plus, Andover, Regency,

etc.)

Grand Total $1.275 Million

Are we prepared to take all the chips off

the table, have assets decrease by over

$300 million and our overall fees

reduced by $1.6 million or more, and,

one wonders if we ever escape the legal

issue of being the asset allocator and

introducer, even if we terminate all

Madoff related relationships?

(

Id.,

Ex. 4;

see also id.

¶ 73)

In a December 17, 1998 email, Ivy's chief

investment manager suggested a “middle of the

road” approach:

I think the time has come for Ivy to

resolve this question and to set a policy

we can all be comfortable with. Let me

propose that we do the following:

Terminate all [Madoff] investments for

the Ivy funds (the $5 mil or so) Write to

the advisory clients telling them we

have done so and the reasons why. Then

leave the rest up to them.

Here are my reasons:

14a

Legally, we will of course still have

liability as investment advisor,

particularly for the ERISA entities, but

we will have insulated ourselves from

liability as GP of our funds.

I imagine that our letters to clients

would serve to at least partially

exculpate Ivy should the worst happen.

We have said that it is important to

maintain at least some level of Ivy fund

investments with Madoff in order to

send a message to the advisory clients

that we have confidence in [Madoff] (as

well as in the other managers we

recommend to them). However, in view

of Howard's deep concerns (which I

share, though not to the same

extent), Ivy should perhaps no longer

express the same vote of confidence in

Madoff. Full withdrawals from

the Ivy funds would send a very clear

message to the clients

regarding Ivy's concerns about this

investment.

If some clients decide to withdraw based

on Ivy's withdrawals from our

own funds, we would have to be

prepared to accept that. Would

the Engineers, Jeanneret and the others

walk away from Madoff

if Ivy withdraws its money? I'm not

15a

sure, but I doubt it. Based on the

amounts of capital they have invested

with [Madoff], my perception is that

they are quite satisfied with Madoff and

would not want to leave. In the case of

Jeanneret, he hardly listens to our

advice at all, and our pleas to

the Engineers for more diversification

have for the most part fallen on deaf

ears.

It's somewhat of a middle of the road

approach, but I think it enables us to

preserve the majority of the fees while

reducing our legal risk.

(

Id.,

Ex. 5;

see also id.

¶ 75) The approach suggested

by Ivy's chief investment manager was not

adopted. Ivy did not close its account with Madoff

but instead limited Ivy proprietary funds'

investments with Madoff to no more than 3% of

assets. (

Id.

¶ 76) Simon and Wohl also did not advise

their clients or Jeanneret about their concerns

regarding Madoff. (

Id.

)

IV.

IVY'S 1998–99 COMMUNICATIONS

WITH PLAINTIFF CONCERNING MADOFF

During a December 30, 1998 meeting with Ivy,

the Trustees informed Simon and Wohl that they

wanted “to eliminate three of the six

managers Ivy had recommended and shift the assets

invested with these [three] managers to Madoff.”

16a

(

Id.

¶ 78;

see also id.

¶ 77) At that time, more than

3% of the Plan's assets were invested in Madoff.

(

Id.

¶ 78) In response, Simon recommended that

the Trustees increase the Plan's Madoff investment

by a smaller amount than what the Trustees had

proposed. (

Id.

) Simon explained that the large

increase proposed by the Trustees “would result in

undue concentration in a single manager.” (

Id.

)

Simon also expressed several concerns about Madoff,

including his “age, the fact that no other entity had

been able to replicate his results, and the fact that he

had custody of the securities and that his accountant

was not a substantial accounting firm.” (

Id.

¶ 79)

The Trustees were already aware of these facts (

id.

),

but nonetheless asked whether—

given Ivy's concerns—the Plan should continue to

invest with Madoff. (

Id.

¶ 81)

Simon assured the Trustees that there was no

reason to terminate the Plan's investment with

Madoff, but suggested that the Trustees limit the

amount of the proposed increase. (

Id.

¶ 86) Simon did

not mention to the Trustees any of the concerns

about Madoff that had been discussed internally

at Ivy. (

Id.

¶ 80) Indeed, Simon told

the Trustees that “Ivy's due diligence had revealed

no problems with Madoff.” (

Id.

¶ 87) Simon

emphasized, however, that “Ivy tends not to have

more than 5%–7% with any[ ]one manager.” (

Id.

)

In a January 12, 1999 letter to the Trustees,

Simon addressed the Plan's continued investment in

Madoff:

17a

I'd like to take this opportunity to

clarify and expand on some of the points

regarding Bernard L. Madoff's

strategies. Over a period of more than

11 years, Ivy has considered, reviewed,

analyzed and performed due diligence

regarding the Madoff firm and the

strategies employed. We have no reason

to believe that the Madoff account is

anything other than what Ivy’s

experience has shown and what the

record demonstrates it to be. In

response to a question

from trustee Bums, we noted that, due

to a lack of external corroborative

evidence, we cannot “close the loop” in a

manner that gives us total comfort. This

is due to aspects of this investment

manager's operations

and Ivy's philosophy, which include:

• There is no separate custodial

function for the securities that Madoff

buys and sells.

• Ivy's philosophy for the last fifteen

years has been and continues to be

that we recommend limiting

investments (generally between 8 and

15%, depending on circumstances) to

any manager in Ivy's roster of

alternative investment managers. We

acknowledge that a number of our

18a

advisory clientele have chosen to

ignore Ivy's recommendations

regarding concentration limits.

In view of the foregoing, we believe that

the Madoff allocation should not be as

large as the trustees originally proposed

at their last Trustee meeting in

December.

(July 14, 2014 Choe Decl. (Dkt. No. 32), Ex.

2;

see

Am. Cmplt. (Dkt. No. 29) ¶¶ 88–90)

In response to Simon's letter

and Ivy's recommendation that the Plan's exposure

to Madoff be limited to no more than 15% of Plan

assets, the Trustees amended the investment

guidelines that governed Ivy's investment of Plan

assets. (

Id.

¶¶ 90, 91) Under the amended guidelines,

no individual investment made by Ivy could exceed

$50 million. (

Id.

)

In 1999, Ivy continued to make presentations

at Trustee meetings and to issue reports to

the Trustees regarding the Plan's investments,

including the Madoff investment. (

Id.

¶ 101) At no

time in 1999 did Ivy indicate anything “improper

about Madoff's operation.” (

Id.

¶ 103) In 1999,

the Trustees paid Ivy $543,000 in performance fees

in connection with the Madoff investment. (

Id.

¶ 105)

V.

THE PLAN'S INCREASED PAYMENTS

TO PLAN PARTICIPANTS

19a

In 1998 and 1999, in light of the reported value of

the Plan's Madoff investment, the Trustees

considered increasing Plan retirement benefits.

(

Id.

¶¶ 93, 94, 97) In September 1998, the Plan's

actuary produced an actuarial valuation report

demonstrating that the Plan could afford to do so.

(

Id.

¶ 94) The report analyzed (1) the market value of

the Plan's assets; (2) the ratio of assets to the present

value of vested benefits; (3) the ratio of assets to the

present value of total accumulated plan benefits; and

(4) projected investment performance. (

Id.

) All of

these calculations were impacted by the stated value

of the Plan's Madoff investment. (

Id.

) On July 29,

1999, the Trustees amended the Plan to

increase pension benefits. The changes were made

retroactive to April 1, 1998. (

Id.

¶ 97)

The Plan amendments increased

monthly pension vesting credit “from 1.8% to 3.3% of

contributions made on behalf of a participant during

a given [P]lan year.” (

Id.

¶ 97) The amendments also

provided certain pensioners with a one-time bonus

payment during the Plan year, beginning on April 1,

1999. (

Id.

) Payments ranged from $260 to $1,460.

(

Id.

) Once the benefits vest, the pension credit

increase cannot be reduced. (

Id.

¶ 98)

VI.

THE BANK'S 2000 ACQUISITION

OF IVY

In 2000, the Bank became interested in

acquiring Ivy because of its “roster of high net worth

individual investors and its ERISA covered employee

20a

benefit plan client base.” (

Id.

¶¶ 107–08)

Negotiations between Ivy and the Bank continued for

approximately thirteen months. (

Id.

¶ 197) During

these negotiations, the Bank reviewed Ivy's assets

under management, including the Madoff

investments. (

Id.

¶ 198) During the

review, Ivy informed the Bank that Ivy intended to

liquidate its Madoff investment and reinvest the

proceeds in an alternative investment. (

Id.

¶

199) Ivy later liquidated its proprietary funds' entire

investment with Madoff. (

Id.

¶ 113) However, “to

avoid suspicion and protect the income stream ...

generated from outside investments in Madoff,”

Simon and Wohl falsely represented to Jeanneret

that Madoff had insisted that Ivy liquidate its

Madoff investment based on a conflict of interest.

(

Id.

¶ 114) Ivy also stated that restrictions imposed

by Madoff prevented it from performing due

diligence on the Plan's Madoff investment. (

Id.

¶¶

116–17)

As a result of the Bank's 2000 acquisition

of Ivy,

3

Simon and Wohl each made $100 million.

(

Id.

¶ 112;

see id.

¶¶ 6, 7) They also became Bank

employees, reporting directly to the Bank's Board of

Directors. (

Id.

¶ 200) The Bank thereafter received

income generated from advisory fees that the Plan

paid to Ivy. (

Id.

¶ 201)

3

The Amended Complaint does not disclose when in 2000

the acquisition took place.

21a

At some point after the Ivy acquisition, the Bank

was informed that (1) Ivy was concerned that there

were insufficient options traded on the CBOE to

support the volume of Madoff's alleged trading; (2)

Madoff had made inconsistent statements

to Ivy regarding his trading strategy; and (3) Ivy was

instructing clients to liquidate their Madoff

investments, and was refusing to place the assets of

new clients with Madoff. (

Id.

¶ 202)

In 2005, the Bank formed an internal Global Risk

Committee to address and assess Ivy’s business

risks. (

Id.

¶ 203) In 2005, this Committee

identified Ivy's exposure to Madoff as its fourth

highest risk (

id.

¶ 204), and in 2007 the Committee

identified Ivy's Madoff investments as one

of Ivy's top risks. (

Id.

¶ 206) These conclusions were

never conveyed to the Trustees. (

Id.

¶¶ 205, 207)

In 2000, Ivy continued to make presentations to

the Trustees and to issue reports to

the Trustees concerning the Plan's Madoff

investment. (

Id.

¶ 118) At no time in 2000 did Ivy or

the Bank advise the Trustees or Jeanneret that the

Madoff investment was no longer prudent, or that

the Plan should liquidate its Madoff investment.

(

Id.

¶¶ 110, 120)

Based on Ivy's recommendation,

the Trustees withdrew $7 million from the Madoff

investment in March 2000. (

Id.

¶ 119) In 2000,

the Trustees paid Ivy $310,000 in performance fees

22a

that were linked directly to the Plan's Madoff

investment. (

Id.

¶ 122)

VII.

IVY DISCLOSES ITS CONCERNS

ABOUT MADOFF TO OTHER CLIENTS

In October 2001, Ivy informed one of its clients

that Ivy's proprietary funds had liquidated their

Madoff investments because Ivy “had concluded that

a continued investment [with Madoff] had become

imprudent.” (

Id.

¶ 124) The client thereafter

directed Ivy to liquidate its Madoff investment. (

Id.

¶

125) In January 2002, Ivy and the Bank began to

advise other clients to liquidate their Madoff

investments, based on concerns that a continued

investment with Madoff was no longer prudent.

(

Id.

¶ 132) During this time, Ivy also “told a potential

investor that it would be inconsistent

with Ivy's fiduciary responsibility to place the

investors' money into a Madoff Investment.” (

Id.

¶

133) That same year, Ivy and the Bank rejected a

proposal that one of Ivy's proprietary funds invest

with Madoff. (

Id.

¶ 138)

Between 2001 and December 2008, Ivy continued

to make presentations to the Trustees and to issue

reports to the Trustees concerning the Plan's Madoff

investment. (

Id.

¶¶ 126, 139, 150) Ivy and the Bank

did not advise the Trustees during this period that it

was not prudent to maintain the Madoff investment,

nor did Ivy and the Bank recommend to

the Trustees that the Plan liquidate its Madoff

investment. (

Id.

¶¶ 128, 142, 146)

23a

The Trustees continued to pay performance fees

to Ivy and the Bank that were directly linked to the

Madoff investment. (

Id.

¶¶ 130, 144, 148) Between

2001 and 2007, the Trustees paid Ivy $952,000 in

performance fees. (

Id.

)

In January 2002, the statements relating to the

Plan's Madoff investment indicated that that

investment had a value of $51,466,764. (

Id.

¶ 134)

Based on Ivy's recommendation,

the Trustees withdrew $6 million from the Plan's

Madoff investment in March 2002. (

Id.

¶ 137)

Between December 2002 and December 2005,

the Trustees withdrew an additional $27 million

from the Plan's Madoff investment. (

Id.

¶¶ 140, 151)

VIII.

MADOFF'S ARREST AND

SUBSEQUENT LEGAL PROCEEDINGS

On December 11, 2008, Madoff was arrested and

the Defendants and the Trustees learned for the first

time that Madoff had been operating a Ponzi scheme.

(

Id.

¶¶ 10, 153) At that time, the stated value of the

Plan's Madoff investment was $51,473,794. (

Id.

¶ 10)

“This revelation immediately caused over $50 million

in Plan assets to lose all value.” (

Id.

¶ 154;

see id.

¶

10)

On February 5, 2009, the United States

Department of Labor (“DOL”) issued guidance to

the trustees of ERISA employee benefit plans that

had invested with Madoff. (

Id.

¶ 159) DOL

recommended that trustees “take steps to assess and

24a

protect the interest of each plan and its participants,

and ... determine whether any third party was

responsible for any losses to the plan stemming from

Madoff investments and if appropriate[,] take action

against such third parties.” (

Id.

¶ 159 (citing

id.,

Ex.

6))

On April 9, 2009, DOL issued a subpoena to

the Trustees relating to the Plan's Madoff

investment. (

Id.

¶ 157) On August 13, 2009,

the New York Attorney General issued a subpoena to

the Trustees relating to the Plan's Madoff

investments. (

Id.

¶ 158)

On November 12, 2010, the

bankruptcy trustee for BMIS filed an adversary

proceeding against the Plan, seeking to “claw back”

$32,974,971 that the Plan had obtained from its

Madoff investment. (

Id.

¶ 155) This amount

represents “the amount of withdrawals [that] the

Plan had made from the Madoff [i]nvestment ... over

and above the deposits the Plan had made ....” (

Id.

)

25a

In other words, the bankruptcy trustee sought to

claw back the Plan's profits.

4

The parties agree that the table set forth below accurately

reflects the Plan's net investment and transactions in its

Madoff investment account between June 27, 1997 and

December 30, 2005:

Date

Event

Net

Investment

6/27/1997

Withdrew

$359,943

$12,725,258

3/27/1998

Withdrew

$7,000,000

$5,725,258

1/5/1999

Invested

$2,300,000

$8,025,258

4/1/1999

Invested

$4,000,000

$12,025,258

3/30/2000

Withdrew

$7,000,000

$5,025,258

9/29/2000

Withdrew

$5,000,000

$25,258 net

investment

3/28/2002

Withdrew

$6,000,000

$5,974,742

in profits

12/31/2002

Withdrew

$3,000,000

$8,974,742

in profits

6/27/2003

Withdrew

$10,000,000

$18,974,742

in profits

12/31/2004

Withdrew

$7,000,000

$25,974,742

in profits

12/30/2005

Withdrew

$7,000,000

$32,974,742

in profits

See

April 30, 2014 transcript of oral argument (Dkt. No. 57) at

16; Def. Br. (Dkt. No. 33) “Madoff Transaction Table” at 5.

26a

IX.

PLAINTIFF'S BREACH OF FIDUCIARY

DUTY CLAIMS

A.

Claims Against Ivy, Simon, and Wohl

Plaintiff asserts three causes of action

against Ivy, Simon, and Wohl for breach of fiduciary

duty in violation of Section 404 of ERISA, 29 U.S.C. §

1104. Plaintiff alleges that these Defendants

breached their duty of prudence (Count I), duty of

loyalty (Count II), and duty to administer the Plan in

accordance with its governing documents and

instruments (Count III). (

Id.

¶¶ 160–195) Plaintiff

contends that Ivy, Simon, and Wohl violated these

duties by (1) not informing the Trustees in December

1998 that they had concluded that it was not prudent

to continue to invest with Madoff; and (2) not

advising the Trustees to liquidate the Plan's Madoff

investment. (

Id.

¶¶ 163, 173, 175, 188) Plaintiff

claims that these Defendants violated their duties to

Plaintiff in order to ensure (1) their continued receipt

of advisory fees; and (2) that the Bank's acquisition

of Ivy would proceed. (

Id.

¶ 174) With respect to

Count III, Plaintiff contends that Ivy, Simon, and

Wohl violated their obligation under the Trustees'

investment guidelines to adopt “a conservative

investment policy, with the primary objective being

the preservation of capital” and the “achievement of

the maximum possible investment return consistent

with the ... primary objective.” (

Id.,

Ex. 1 at 16;

id.

¶

184) Plaintiff claims that by 1998, Ivy, Simon, and

Wohl knew or should have known that continuing to

27a

invest with Madoff was no longer consistent with the

investment guidelines. (

Id.

¶ 186)

Pursuant to 29 U.S.C. § 1109, Plaintiff seeks to

recover from Defendants Ivy, Simon, and Wohl losses

stemming from the alleged fiduciary breach of the

duties of prudence and loyalty, as well as the duty to

administer the Plan in accordance with the 1994

Investment Guidelines. (

Id.

¶¶ 168–69, 180–81, 193–

94) Plaintiff also alleges that under 29 U.S.C. § 1109,

Defendants Simon and Wohl “must disgorge to the

Plan the $100 million each received” from the Bank's

acquisition of Ivy. (

Id.

¶¶ 170, 182, 195)

B.

Claims Against the Bank

In Count IV of the Amended Complaint, Plaintiff

claims that the Bank knowingly participated in Ivy,

Simon, and Wohl's breach of their fiduciary duty to

the Plan. (

Id.

¶¶ 196–209) Plaintiff contends that the

Bank knew that Ivy, Simon, and Wohl had breached

their fiduciary duties to the Plan, and that that Bank

“acquiesced in those breaches.” (

Id.

¶ 208) Plaintiff

claims that the Bank's acquiescence in its co-

defendants' breaches, and the Bank's receipt of

investment advisory fees paid by the Plan, renders

the Bank jointly and severally liable. (

Id.

¶ 209)

X.

PROCEDURAL HISTORY

This action was filed on May 10, 2013 (Dkt. No.

1), and was assigned to the Honorable Lewis A.

Kaplan. (Dkt. No. 2) On August 2, 2013, Defendants

28a

moved to dismiss the Complaint pursuant

to Fed.R.Civ.P. 12(b)(1) and 12(b)(6). (Dkt. No. 10)

On April 30, 2014, Judge Kaplan heard oral

argument concerning the motion to

dismiss.

See

April 30, 2014 Oral Argument Tr. (Dkt.

No. 27). Judge Kaplan reserved decision and granted

Plaintiff leave to amend the Complaint. Judge

Kaplan recommended that—in the Amended

Complaint—Plaintiff “spell out, with precision, what

the theories of injury are and what the facts are that

they rest on[.]” (

Id.

at 27–28) On May 1, 2014, Judge

Kaplan issued an order denying Defendants' motion

to dismiss “without prejudice to the filing by

[P]laintiff of an amended complaint and a motion

addressed thereto on the basis stated on the record

in open court.” (Dkt. No. 26)

On May 29, 2014, Plaintiff filed an Amended

Complaint. (Dkt. No. 29) On July 14, 2014,

Defendants moved to dismiss the Amended

Complaint pursuant to Fed.R.Civ.P.

12(b)(1) and 12(b)(6). (Dkt. No. 31)

On February 24, 2015, the case was reassigned to

this Court.

XI.

MADOFF–RELATED CLAW BACK

PROCEEDINGS

On November 12, 2010, the trustee for Bernard L.

Madoff Investment Securities LLC (the

“BMIS trustee”) initiated an adversary proceeding

against Plaintiff in Bankruptcy Court for the

29a

Southern District of New York. (Am.Cmplt. (Dkt. No.

29) ¶ 155;

see Securities Investor Protection

Corporation v. BLMIS,

Adv. No. 08–1789, Adv. No.

10–05210 (Bankr.S.D.N.Y.)) The

BMIS trustee sought to “claw back,” or recover,

$32,974,971 from the Plan. This sum represents the

amount of money that the Plan withdrew from its

Madoff account that exceeds the amount that the

Plan had invested with Madoff. (

Id.

) In other words,

the BMIS trustee sought to recover the profits that

the Plan had realized from its investment with

Madoff.

After Madoff's Ponzi scheme was disclosed, the

Securities Investor Protection Corporation (the

“SIPC”)—a non-profit corporation—initiated a

liquidation proceeding of BMIS, pursuant to the

Securities Investor Protection Act (“SIPA”).

In re

Bernard L. Madoff Inv. Sec. LLC (“In re BLMIS

I”),

654 F.3d 229, 233 (2d Cir.2011).

SIPA establishes procedures for

liquidating failed broker-dealers and

provides their customers with special

protections. In a SIPA liquidation,

a fund of “customer property,” separate

from the general estate of the failed

broker-dealer, is established for priority

distribution exclusively among

customers. The customer

property fund consists of cash and

securities received or held by the

broker-dealer on behalf of customers,

30a

except securities registered in the name

of individual customers. 15 U.S.C. §

78

lll

(4). Each customer shares ratably

in this fund of assets to the extent of the

customer's “net equity.”

Id.

§ 78fff–2(c)

(1)(B).

Id.

“Where ... the customer property fund is not

sufficient to pay customers in full, [however,] SIPA

empowers a trustee to claw back any

transferred funds ‘which, except for such transfer[s],

would have been customer property.’”

In re

Bernard L. Madoff Inv. Sec. LLC (“In re BLMIS

II”),

773 F.3d 411, 415 (2d Cir.2014) (quoting 15

U.S.C. § 78fff–2(c)(3)). “But a trustee can only claw

back those transferred funds ‘if and to the extent

that [they are] voidable or void under the provisions

of’ the Bankruptcy Code.”

Id.

(quoting 15 U.S.C. §

78fff–2(c)(3)) (alterations in original).

Under 11 U.S.C. § 546(e) of the Bankruptcy Code,

a bankruptcy trustee

“may not avoid a transfer that is a ...

settlement payment, as defined in

section ... 741 of this title, made by [a] ...

stockbroker ..., or that is a transfer

made by [a] ... stockbroker ... in

connection with a securities contract, as

defined in section 741(7), ... except

under section 548(a)(1) (A) of this title.”

31a

Id.

at 417 (quoting 11 U.S.C. § 546(e)) (alterations in

original).

Under 11 U.S.C. § 548(a)(1),

[t]he trustee may avoid any transfer ...

of an interest of the debtor in property,

or any obligation ... incurred by the

debtor, that was made or incurred on or

within 2 years before the date of the

filing of the petition, if the debtor

voluntarily or involuntarily—

(A) made such transfer or incurred

such obligation with actual intent

to hinder, delay, or defraud any

entity to which the debtor was or

became, on or after the date that

such transfer was made or such

obligation was incurred [or]

indebted....

11 U.S.C. § 548(a)(1)(A).

The Second Circuit has addressed whether

Madoff customers, like Plaintiff, are entitled to keep

profits realized from investments with

Madoff.

See In re BLMIS II,

773 F.3d 411. The court

concluded that “[Section] 546(e) shields [the]

[withdrawal] transfers from avoidance because they

were ‘made in connection with a securities contract,’

and were also ‘settlement payment [s].’”

Id.

at 417.

Accordingly, to the extent that a Madoff investor

32a

made withdrawals from its Madoff account more

than two years before the BMIS bankruptcy petition

was filed, those payments are not subject to claw

back under Sections 546(e) and 548(a)(1) of the

Bankruptcy Code.

Id.

at 423.

Here, Plaintiff withdrew $32,974,971 in Madoff-

related profits more than two years before the BMIS

bankruptcy petition was filed.

See

Am. Cmplt. (Dkt.

No. 29) ¶¶ 151, 153;

Securities Investor Protection

Corporation v. BLMIS,

Adv. No. 06–1789, Adv. No.

10–05210 (Dkt. No. 1) (Bankr.S.D.N.Y.). The parties

agree that Plaintiff is entitled to retain the

$32,974,971 in profits that the Plan realized from its

Madoff investment. (Pltf.Ltr. (Dkt. No. 39); Def. Ltr.

(Dkt. No. 38))

XII.

DEFENDANT'S MOTION TO DISMISS

THE AMENDED COMPLAINT

Defendants Ivy, Simon, and Wohl move to dismiss

Plaintiff's claims against them (

see

Am. Cmplt. (Dkt.

No. 29), Counts I, II, and III) on the grounds that

Plaintiff has not sustained an actual injury sufficient

to establish Article III standing or to plead a cause of

action under ERISA. (Def.Br. (Dkt. No. 33) at 11)

Defendant Bank of New York Mellon moves to

dismiss Plaintiff's claim against it (

see

Am. Cmplt.

(Dkt. No. 29), Count IV) for failure to state a claim

under Fed.R.Civ.P. 12(b)(6). (Def.Br. (Dkt. No. 33) at

26)

DISCUSSION

33a

I.

LEGAL STANDARDS

A.

Rule 12(b)(1) Standard

“Article III of the Constitution limits the

jurisdiction of federal courts to the resolution of

‘cases' and ‘controversies.’”

W.R. Huff Asset Mgmt.

Co., LLC v. Deloitte & Touche LLP,

549 F.3d 100,

106 (2d Cir.2008) (quoting U.S. Const. art. III, § 2).

“In order to ensure that this ‘bedrock’ case-or-

controversy requirement is met, courts require that

plaintiffs establish their ‘standing’ as ‘the proper

part[ies] to bring’ suit.”

Id.

(quoting

Raines v.

Byrd,

521 U.S. 811, 818, 117 S.Ct. 2312, 138 L.Ed.2d

849 (1997); citing

DaimlerChrysler Corp. v.

Cuno,

547 U.S. 332, 341, 126 S.Ct. 1854, 164 L.Ed.2d

589 (2006)).

“There are three Article III standing

requirements: (1) the plaintiff must have suffered an

injury-in-fact; (2) there must be a causal connection

between the injury and the conduct at issue; and (3)

the injury must be likely to be redressed by a

favorable decision.”

Kendall v. Emps. Ret. Plan of

Avon Products,

561 F.3d 112, 118 (2d

Cir.2009) (citing

Lujan v. Defenders of Wildlife,

504

U.S. 555, 560–61, 112 S.Ct. 2130, 119 L.Ed.2d 351

(1992)). “The injury in fact required to support

constitutional standing is ‘an invasion of a legally

protected interest which is (a) concrete and

particularized, and (b) actual or imminent, not

conjectural or hypothetical.’”

Donoghue v. Bulldog

Investors Gen. P'ship,

696 F.3d 170, 175 (2d

34a

Cir.2012) (quoting

Lujan,

504 U.S. at 560–61, 112

S.Ct. 2130 (internal quotation marks and citations

omitted));

accord W.R. Huff Asset Mgmt. Co.,

549

F.3d at 106;

see also id.

¶¶ 170,

182, 195) Plaintiff seeks, in particular, recovery of

the entire $200 million that Simon and Wohl

56a

received in connection with the Bank's acquisition

of Ivy.

8

(Am.Cmplt. (Dkt. No. 29) ¶¶ 170, 182, 195)

Plaintiff contends that Simon and Wohl “plac[ed]

the Plan's assets at risk for their own benefit” (

id.

¶

110) when they did not fully disclose all of their

concerns about Madoff to the Trustees. (

Id.

¶¶ 102–

106) According to Plaintiff, Simon and Wohl did not

disclose their concerns about Madoff's trading

strategy because they wanted the Plan to continue

its investment with Madoff, because this would help

ensure that the Bank's acquisition of Ivy would

proceed.

See id.

¶¶ 107–115.

A.

Applicable Law

Section 409 of ERISA, 29 U.S.C. § 1109(a), provides

that

8

Counts I, II, and III of the Amended Complaint seek

disgorgement from Simon and Wohl, but not from Ivy.

(Am.Cmplt. (Dkt. No. 29) (

ad damnum

clauses) at 28, 31, 35)

Given that Ivy—and not Simon and Wohl individually—was

paid advisory and performance fees (

see

Am.Cmplt. (Dkt. No.

29) ¶¶ 26, 41, 105, 122, 130, 144, 148;

id.,

Ex. 1 at 9), this Court

does not read these counts as seeking disgorgement of advisory

and performance fees paid to Ivy. Count IV of the Amended

Complaint purports to seek “disgorgement of all investment

advisory fees paid by Plaintiff to Ivy*BONY,” but Count IV is

brought solely against the Bank. (Am.Cmplt. (Dkt. No. 29) at

37)

57a

[a]ny person who is a fiduciary with

respect to a plan who breaches any of

the responsibilities, obligations, or

duties imposed upon fiduciaries by this

subchapter shall be personally liable to

make good to such plan any losses to

the plan resulting from each such

breach,

and to restore to such plan any

profits of such fiduciary which have

been made through use of assets of the

plan by the fiduciary ....

29 U.S.C. § 1109(a) (emphasis added).

Disgorgement may be appropriate where a plan

fiduciary has put a plan's assets at risk—not for the

exclusive benefit of plan participants—but at least in

part to serve the fiduciary's personal

interest.

See Amalgamated Clothing & Textile

Workers Union, AFL–CIO v. Murdock,

861 F.2d

1406, 1408 (9th Cir.1988) (finding disgorgement

remedy appropriate where “plan assets were

invested and held and thereby put at risk not for the

exclusive benefit of the Plan's participants and

beneficiaries ... but for the benefit of one of the

fiduciaries” (emphasis, quotation marks, and

alterations omitted)). In such circumstances, a plan

may recover “any profits of such fiduciary which

have been made through [the improper] use of assets

of the plan by the fiduciary.” 29 U.S.C. § 1109(a). An

ERISA plaintiff must plead facts showing a causal

connection between a fiduciary's improper use of

plan assets and profits made by the fiduciary,

58a

however.

Leigh v. Engle,

727 F.2d 113, 137 (7th

Cir.1984) (“[Section] 1109 permits recovery of a

fiduciary's profits only where there is a causal

connection between the use of the plan assets and

the profits made by fiduciaries”; remanding to

district court for determination of whether

defendants' profits were attributable to their use of

plan assets). An ERISA plan need not demonstrate

that it suffered a loss in order to obtain a

disgorgement remedy.

See Murdock,

861 F.2d at

1412 (immaterial whether beneficiaries actually lost

money as a result of the fiduciaries'

breach);

Leigh,

727 F.2d at 122 (“The nature of the

breach of fiduciary duty alleged here is not the

loss

of

plan assets but instead the

risking

of the trust's

assets at least in part to aid the defendants in their

acquisition program.”) (emphasis in original).

The Ninth Circuit has summarized the purpose of

the disgorgement remedy as follows:

[T]he purpose behind th[e]

[disgorgement of profits] rule is to deter

the fiduciary from engaging in disloyal

conduct by denying him the profits of

his breach. G. Bogert and G.

Bogert,

The Law of Trusts

and Trustees

§ 543, at 218 (2d ed.1978).

If there is no financial incentive to

breach, a fiduciary will be less tempted

to engage in disloyal

transactions.

Id.

The purpose of the rule

is not to make beneficiaries whole for

59a

any damages they may have suffered.

In fact, whether beneficiaries have been

financially damaged by the breach is

immaterial. [

Id.

] at 217. Rather, the

objective is to make “disobedience of

the trustee to the [duty of loyalty] so

prejudicial to him that he and all

other trustees will be induced to avoid

disloyal transactions in the

future.”

Id.

at 218.

Murdock,

861 F.2d at 1411–12.

B.

Analysis

In order to make out a claim for disgorgement

here, Plaintiff must plead facts demonstrating that it

is plausible to believe that (1) Simon and Wohl

induced the Trustees to leave Plan assets with

Madoff in order to help ensure that the Bank's

acquisition of Ivy would be consummated; and (2)

that Simon and Wohl would not have received some

portion of their $200 million payout had they

disclosed their concerns about the Madoff investment

to the Trustees. Stated another way, Plaintiff must

plead facts making it plausible to believe that Simon

and Wohl derived some amount of additional profit

by not disclosing to the Trustees their concerns

regarding Madoff's trading strategy.

Here, the Amended Complaint pleads facts

demonstrating that Simon and Wohl were concerned

about the effect on Ivy's fees and assets under

60a

management if they recommended to clients that

their Madoff investments be terminated. In a

December 16, 1998 email to Simon and other

senior Ivy executives, Wohl reports that he is

troubled by Madoff's conflicting accounts regarding

his trading strategy, and he states that continued

investment in Madoff cannot be justified by blind

faith “based on great performance.” (Am.Cmplt. (Dkt.

No. 29), Ex. 3 and ¶ 71). Simon responds

that Ivy's proprietary funds' investments with

Madoff are not substantial, but that the “bigger issue

is the $190 mill[ion] or so that our [clients] have with

[Madoff].” (

Id.,

Ex. 4 and ¶ 73) Simon goes on to

write:

Are we prepared to take all the chips off the table,

have assets decrease by over $300 million and our

overall fees reduced by $1.6 million or more, and, one

wonders if we ever “escape” the legal issue of being

the asset allocator and introducer, even if we

terminate all Madoff related relationships?

(

Id.

)

The Amended Complaint also alleges that

Defendants Simon and Wohl knew and

understood that if Ivy's assets under

management stemming from those

clients were reduced because of full and

complete disclosure of Ivy's conclusion

that a continued investment in the

Madoff Investment had become

61a

imprudent, Ivy's value on the open

market would substantially decrease

which would result in a reduction in

their anticipated payout.

(

Id.

¶ 109)

It is not clear from the Amended Complaint

whether Simon and Wohl's discussions about

disclosing to clients their concerns about Madoff's

trading strategy were taking place at the same time

Simon and Wohl were negotiating with the Bank

about an acquisition of Ivy.

See id.

¶ 197

(“negotiations that preceded BONY's acquisition

of Ivy lasted approximately thirteen months”);

id.

¶

201 (the Bank acquired Ivy some time in 2000);

id.

¶

107 (At some point “[i]n the year 2000 ... Ivy itself

had become an acquisition target of defendant

BONY.”). Because no date for the Ivy acquisition is

specified in the Amended Complaint, it is not

possible to determine whether Simon and Wohl's

December 1998 communications about Madoff were

taking place during the time that negotiations

regarding the Ivy acquisition were ongoing.

However, given the Amended Complaint's

allegations that (1) in December 1998 Simon and

Wohl feared a $300 million drop in assets under

management if they disclosed their concerns about

Madoff's trading strategy to clients; (2)

the Ivy acquisition took place at some point in 2000,

and was preceded by thirteen months of negotiations;

and (3) Ivy began sharing its concerns about Madoff

62a

with clients in 2001, after the Bank's acquisition

of Ivy was complete, this Court will assume—for

purposes of resolving Defendants' motion—that

Plaintiff has pled sufficient facts to make it plausible

to believe that Simon and Wohl did not share their

suspicions about Madoff's trading strategy with

the Trustees because of concerns that such a

disclosure could somehow derail the Bank's

acquisition of Ivy.

Plaintiff has not alleged, however, that had

Simon and Wohl fully disclosed their concerns about

Madoff, the Trustees would, in fact, have withdrawn

some or all of the Plan assets under Ivy’s

management. Plaintiff alleges only that

“[h]ad Ivy informed the then Trustees of all of the

concerns and facts known to Ivy about the Madoff

Investment, ... the then Trustees would not have had

a position in the Madoff Investment....” (Am.Cmplt.

(Dkt. No. 29) ¶ 123) The Amended Complaint does

not assert that Plaintiff would have removed Ivy as

its investment adviser or withdrawn any portion of

Plan assets that were under Ivy's management.

The absence of any allegation that Plaintiff would

have withdrawn its assets from Ivy’s management is

fatal to Plaintiff's disgorgement claim. Plaintiff has

alleged that the Bank “was interested in Ivy because

of its roster of high net worth individual investors

and its ERISA covered employee benefit plan client

base.” (

Id.

¶ 108) Plaintiff has also alleged that

“if Ivy’s assets under management stemming from

those clients were reduced ... Ivy's value on the open

63a

market would substantially decrease.” (

Id.

¶ 109)

But given that Plaintiff has not alleged that it would

have terminated its relationship with Ivy—or

withdrawn a portion of the Plan assets

under Ivy's management—in the event Simon and

Wohl had made full disclosure about Madoff,

Plaintiff has not demonstrated that that disclosure

would have negatively affected Ivy's assets under

management or related fees.

Moreover, the Amended Complaint does not plead

facts suggesting that Ivy's placement of its clients'

assets with Madoff factored into the price the Bank

was willing to pay to acquire Ivy. Indeed, the

Amended Complaint states that Ivy informed the

Bank of its concerns about Madoff. (

Id.

¶ 113 (Madoff

investment concerns “had been withheld from the

then Trustees but provided to [the Bank]”);

see id.

¶

199 (Ivy informed the Bank it intended to liquidate

its Madoff investment))

In sum, to demonstrate that Simon and Wohl

would not have garnered $200 million in profit from

the Bank's acquisition of Ivy had they fully disclosed

their concerns about Madoff to Plaintiff, it is not

sufficient for Plaintiff to plead simply that it would

have terminated its Madoff investment. Instead,

Plaintiff must allege facts demonstrating that it

would have withdrawn some portion of Plan assets

from Ivy's management. Absent such allegations,

there is no reason to believe that fuller disclosure

about Madoff would have negatively

affected Ivy's assets under management or fees, and

64a

thus its acquisition price. Because Plaintiff has not

made such allegations, it has not plausibly

demonstrated that Simon and Wohl's alleged

improper use of Plan assets generated profits beyond

what they would otherwise have

made.

See Leigh,

727 F.2d at 137 (“[Section]

1109 permits recovery of a fiduciary's profits only

where there is a causal connection between the use

of the plan assets and the profits made by

fiduciaries”; remanding to district court for

determination of whether defendants' profits were

attributable to their use of plaintiffs' assets). The

disgorgement claim will be dismissed.

IV.

PLAINTIFF'S CLAIM AGAINST THE

BANK

In Count IV of the Amended Complaint, Plaintiff

contends that the Bank—a non-fiduciary to the

Plan—knowingly participated in Ivy, Simon, and

Wohl's alleged breach of fiduciary duty. (Am.Cmplt.

(Dkt. No. 29) ¶ ¶ 196–209) The Bank has moved to

dismiss Count IV for failure to state a claim

under Fed.R.Civ.P. 12(b)(6). (Def.Br. (Dkt. No. 33) at

26–28)

The Second Circuit has recognized “the principle

that parties who knowingly participate in fiduciary

breaches may be liable under ERISA to the same

extent as the fiduciaries.”

Lowen v. Tower Asset

Mgmt., Inc.,

829 F.2d 1209, 1220 (2d

Cir.1987) (citing

Thornton v. Evans,

692 F.2d 1064,

1077–78 (7th Cir.1982);

Donovan v. Daugherty,

550

65a

F.Supp. 390, 410–11 (S.D.Ala.1982)) (parentheticals

omitted). The court has noted that

[a]uthority for recovery against non-

fiduciaries is derived from trust law

principles, upon which ERISA is

based,

see Freund v. Marshall & Ilsley

Bank,

485 F.Supp. 629, 641–42

(W.D.Wis.1979), and on ERISA's

remedial provisions, which entitle

plaintiffs:

(A) to enjoin any act or practice

which violates any provision of [Title

I of ERISA] or the terms of the plan,

or (B) to obtain other appropriate

equitable relief (i) to redress such

violations or (ii) to enforce any

provision of [Title I] or the terms of

the plan. 29 U.S.C. § 1132(a)(3).

Id.

“The well-settled elements of a cause of action for

participation in a breach of fiduciary duty are (1)

breach by a fiduciary of a duty owed to plaintiff, (2)

defendant's knowing participation in the breach, and

(3) damages.”

Diduck v. Kaszycki & Sons

Contractors, Inc.,

974 F.2d 270, 281–82 (2d

Cir.1992),

abrogated on other grounds by Gerosa v.

Savasta & Co.,

329 F.3d 317 (2d Cir.2003) (citing

S &

K Sales Co. v. Nike, Inc.,

816 F.2d 843, 847–48 (2d

Cir.1987)). “The knowledge element of this cause of

66a

action can be broken down into two elements, namely

(1) knowledge of the primary violator's status as a

fiduciary; and (2) knowledge that the primary's

conduct contravenes a fiduciary duty.”

Gruby,

838

F.Supp. at 835 (citing

Diduck,

974 F.2d at 282–83).

With respect to the second element, “constructive

knowledge suffices.”

Diduck,

974 F.2d at 283. “A

defendant who is on notice that conduct violates a

fiduciary duty is chargeable with constructive

knowledge of the breach if a reasonably diligent

investigation would have revealed the

breach.”

Id.

“One participates in a fiduciary's breach

if he or she affirmatively assists, helps conceal, or by

virtue of failing to act when required to do so enables

it to proceed.”

Id.

at 284.

Here, the allegations in the Amended Complaint

are sufficient to satisfy the knowledge element.

Plaintiff alleges that “[u]pon its acquisition of Ivy in

2000, or thereafter,” the Bank was informed of the

suspicious facts and circumstances concerning

Madoff's trading strategy, and learned “that Ivy was

instructing clients other than the Plan to divest

themselves of their Madoff investment and was

telling new clients that it could not place the new

clients' assets with Madoff consistent

with Ivy fiduciary responsibilities.” (Am.Cmplt. (Dkt.

No. 29) ¶ 202) The Amended Complaint also alleges

that—after the acquisition—the Bank formed an

internal committee to assess Ivy's business risks and

determined that Ivy's Madoff investments were its

fourth highest risk in 2005, and one of its top risks in

2007. (

Id.

¶¶ 203, 204, 206)

See Gruby,

838 F.Supp.

67a

at 835 (allegations sufficient to establish knowledge

element where plaintiff alleged that defendant—a

consultant to the pension fund—consulted with the

breaching fiduciaries of the pension fund, and was

solicited by the breaching fiduciaries for advice

regarding the pension fund).

The Amended Complaint does not allege facts

creating a plausible inference that the Bank

participated in Ivy's fiduciary breach, however.

Plaintiff simply alleges that “[b]y virtue of its

acquiescence and its receipt of the investment

advisory fees paid by the Plan, Defendant BONY

became a knowing participant in [its co-defendants']

fiduciary breach....” (Am.Cmplt. (Dkt. No. 29) ¶ 209)

Plaintiff cites no law suggesting that knowledge

combined with receipt of advisory fees is sufficient to

state a claim for knowing participation in the

fiduciary breach of another. To the contrary, case law

indicates that Plaintiff must plead facts

demonstrating that the Bank “acted ... [to] caus[e]

the prohibited investment,”

Lowen,

829 F.2d at 1220,

or that it “affirmatively assist[ed], help[ed] conceal,

or by virtue of failing to act when required to do so

enable[d] [the fiduciary breach] to

proceed.”

Diduck,

974 F.2d at 284;